Tuesday, May 19, 2009

The Great Right North: Lessons From Canada

WASHINGTON POST -- Long derided by American conservatives as "socialist" and praised by the left for its generous government spending, Canada is casting off those stereotypes. Over the past few years, while U.S. politicians presided over huge increases in spending and debt, the Canadian government tightened its belt, slashed tax rates and balanced budgets. Consider these trends:

As as a trained economist can't you make at least one post explaining to your readers the dangers of deflation and why mild 2% inflation is good.

Because when I read statements like from QT like,

I fear that massive fiscal stimuli in the U.S. and Canada may well lead to hyper-inflationary. I cry a little bit inside.

Is that hard to understand that when everyone is hoarding cash and not spending, we should fear deflation not inflation. And the spending by the government does not come even close to making up for the drop in spending in the private sector that we have seen over the past year.

If, and this is a HUGE IF, the efforts by the Fed and the government are successful and get businesses to invest and consumers to spend again, the Fed can always raise rates at the slightest sign of inflation.

This is Economics 101 and yet people still don't get it because it doesn't fit in to their political beliefs. Perhaps Paul Krugman is right and we really are living through the Dark Age of Economics

Mac is right. Our Keynesian economies are built on an inflationary model, but never fear. I just heard that BAC issued 800M shares at $10/share. I'm sure other banks will follow suit with their tertiary offerings. Since banks stocks are valued fairly, per Doug Kass, Cramer, etc. the banks are literally creating more money as we speak. For a world that lost a shadow banking system of money-leveragers, this inflationary news is welcomed. Now that we lost our retirement savings and pensions in the stock market, and the government pushed up the timetable of insolvency for our social programs (Medicare, SocSec), we at least can count no our remaining money having little buying power. Wait a second...

Let's not get carried away with the CANADA/NORWAY thing. Do you really think either of these leftist countries is doing a better job or could it just be that they both happen to sit on some of the largest OIL reserves in the world. Canada has 1/10th the population of the U.S. and the second highest OIL reserves in the world. Norway's population is about 1/100th of the U.S. and it sits on enormous reserves of OIL which have been producing enormous revenues for decades now. When you also take into account the defense budgets of these socialist countries who rely on someone else to protect them it becomes easy to understand how their numbers look good especially after the run they've had in OIL revenue.I could go on and on but let's just address one other issue which leftists like to throw on the table. Health Care ! Yes it's free but it's also inferior and when the OIL runs out they'll have a lousy health care system that will bankrupt both countries ! Rgds, Dave

Capital is formed from savings NOPE! Wrong! That's what happens when you have a functional banking system which I'll accept is true 90% of the time.

But in our current situation, those savings are just green pieces of paper doing nothing.

Here is the sad thing. This is common economics knowledge. This is not a conservative versus liberal argument. Both Keynes and Friedman understood this. Their only difference was in the solution to this problem. Keynes solution was for the government to spend, spend, spend. Friedman's was for the government to print money.

But since we haven't had a serious financial panic in decades we have gotten these hard learned lessons from 70 years ago.

The BAC number expanded as I typed. It went to 1.25M shares at $10.77 for $13B. Although I think the bank models are in dire straits, commodity inflation certainly is starting to come about. I am watching copper though, and it seems stuck at $2/lb because manufacturing is non-existent, as Japan's exports are down huge, and their GDP reported today, is at a record low. Mac's right about Luskin. Don's pretty much been clueless this whole time.

That's such a cute name!Q-tippy is Canadian. You haven't been around long enough to sob about her sorry husband's travails. Unfortunately, she sucks at the teat of and pines for the almighty American plastic tits and ass.

She's a veritable and certifiable twit who is confounded with orders of magnitude.

Good economists (like our host) permit all points of view and admit mistakes.Your blog host teaches 2 digit IQ students in the ghetto of America. Maybe you can "Michael Moore" a film two decades later about libertarian professorial travails. Title it, Perry & the POW. Wow, you wasted your time in the military, didn't you Miller?

You may be right although time makes fools of us all. It will be interesting to see what actually happens.

Limitup,

Absolutely spot on. Oil revenues in Alberta have been driving the Canadian economy for the last several years. Unfortunately for Alberta et al., the world price of oil has declined making the tar sands far less lucrative...dare we say borderline.

Robert,

You're right 1% of GDP seems like very little. I tend to look at it from the standpoint of the percentage of the total federal budget rather than a percentage of GDP. When you start running deficits and the country is still in fairly decent shape, you have to wonder what the long term consequences will be. We did this under Trudeau and got creamed when world interest rates went up in the 1980s. It has taken years to get our house in order so some of us are not thrilled with the present direction.

One can justify addressing the immediate financial credit crunch however, I am not convinced that stimulus is warranted across the broad spectrum of the Canadian economy. The U.S. has experienced more widespread disruption in housing and manufacturing so stimulus may be warranted. Canada has managed to escape the worst of the recession with the exception of manufacturing.

The problem with stimulus is the tendency of vested interests to game the system as Joseph Stiglitz pointed out.

As for that dead corpse, he just won a Noble Prize.Yeah, and so did John Forbes Nash. Like Nash, Krugman immediately went out to the shed and started delving into conspiracy theories.

People, including Nash himself, recognized the he was nuts. Krugman, on the other hand, simply checked into that asylum known as the New York Times. He also managed to pick up a following of little leftist groupies.

Does the shoe fit?

Luskin made a hobby out of correcting Krugman's lies and distortions. Even if he has been wrong on the economy, he's been 100% right about Krugman.

Perhaps, it is well to consider how little partisanship contributes to a discussion. It is very easy to project anger and frustration towards others or to be dismissive of their positions but does it persuade? Does someone who is treated like an idiot if they don't agree really think "Oh, you're so right. How could I be so dumb"?

Mach & I have different opinions on inflation/deflation which can only be judged over time. It is very difficult to make future predictions on any subject particularly one with as many variables as economics. I may be wrong and he may be right or both of us could be wrong.